Frontpage Interview’s Robert Murphy has a Ph.D. in economics from New YorkUniversity, where he studied with Austrian economists Israel Kirzner and Mario Rizzo. After graduating in 2003 he taught for three years at HillsdaleCollege. Last spring he decided to leave academia for the private financial sector, and now works as a research and portfolio analyst for the famous Arthur Laffer in Nashville, TN. He is the author of the new book The Politically Incorrect Guide to Capitalism.

FP: Robert Murphy, welcome to Frontpage Interview.

Murphy: It's my pleasure. Thank you for having me.

FP: What inspired you to write this book?

Murphy: The general answer is that we economists have done a terrible job getting our views out into the mainstream. As I say in the book, the average Joe believes Stephen Hawking when he writes that an electron can be in two places at the same time, but that same layman won't trust Milton Friedman when he writes that free trade is good forAmericans.

But the particular answer is that my friend, Tom Woods, author of the Politically Incorrect Guide to American History, introduced me to the publishers and has encouraged me at every step.

FP:Tell us what capitalism is.

Murphy: Capitalism is a system where there are well-defined, private property rights. That's just a fancy way of saying it's an arrangement where people have to deal with each other through voluntary exchanges, of not only their material goods but also their labor services. It implies the concept of "free enterprise," because under capitalism people are free to start whatever business they desire, or sell their labor to an employer of their choice.

FP: Why does the Left hate capitalism so much?

Murphy: That's a really good question. I think there's probably no single reason, but I think I big part is this: Many leftists are cynical, bitter people. They have a natural distrust of success. And since the capitalist system undeniably works -- and moreover, it works precisely by harnessing the self-interest of people -- then its very essence is offensive to these people. For example, if you're a starving artist, anybody who makes it big must automatically be a "sell out." I think that type of mentality explains the knee jerk hatred of everything commercial.

FP: I would also add here that there is the factor of self-loathing and self-contempt. Many leftists are the greatest beneficiaries of capitalism.

So why is central planning such a miserable failure? The government almost always makes worse the very problems it is supposed to cure. What universal law is in the works here?

Murphy: There are (at least) two things going on here. The first is a selection argument, if you will. To wit: the type of person who goes into politics -- and worse, in a totalitarian society the type of person who becomes dictator -- isn't a Mother Theresa. Even restricting ourselves to the United States, just look at our political system in practice. You can't possibly get to be a governor or senator, let alone president, without lying constantly and voting for bills that would've turned your stomach when you first went into politics. So the process itself is very corrupting, and therefore at any given time the politicians running the show are not paragons of virtue.

But beyond that -- and this is an argument fully developed by Ludwig von Mises in the early 1900s -- is the fact that government central planners can't rely on market prices. As I explain in my book, free market prices and the resulting profit/loss results are far from arbitrary; they indicate whether a firm is using resources efficiently. So when the government steps in and overrides what those prices are saying, the result is always counterproductive, at least if you take the politicians' speeches at face value.

FP: The Left hates to hear this, but it’s only capitalism that can save the environment isn’t it?

Murphy: That's right. Market prices (for raw materials and garbage disposal) give just the right incentives to make proper choices when it comes to recycling or dumping. And capitalized market values are also the reason owners take good care of their property. The bald eagle was in trouble because nobody owned it. You never hear about cows being on the verge of extinction, even though we humans have a natural proclivity for slaughtering them. The reason, of course, is that the ranchers would never be so foolish as to kill the last two, just like farmers don't eat all of their seed corn.

FP: Tell us a few more myths which engender the hatred of capitalism. For instance, the Left loves to argue that the free market caused slavery and the Great Depression etc.

Murphy: Sure thing.

The Great Depression is pretty straightforward. You have the Federal Reserve -- basically a cartel of banks -- established by 1914, which then pumped artificial reserves into the monetary and banking system. This caused the artificial boom of the 1920s, and sowed the seeds for the bust. Then FDR's horrible New Deal Policies turned a bad two-year depression into the worst in American history.

As far as slavery, this is one area where I myself became more radical as I conducted the research for the book. If you think about it for a moment, slavery really makes no sense economically. If you're a slave, then your incentive is to produce the bare minimum to avoid a whipping. But if you're a free laborer, you have an incentive to produce more than the guy next to you, because you'll get paid more (or get promoted, etc.).

So in a truly free market -- even if it started out with some people classified as the "property" of other people -- there would be tremendous incentives for the slaves to buy their freedom from their masters. Don't get me wrong, that would be horribly unfair and they shouldn't have to do that in the first place, but nonetheless widespread slavery wouldn't persist if the rest of the economy were a free market.

Yet that's not what happened historically. Indeed, there were all sorts of government interventions that propped up the "peculiar institution." Just a few examples: (1) mandatory slave patrols, in which the local governments forced non-slave owners to defray the costs of the institution, (2) laws against educating slaves, and (3) laws curtailing manumission, i.e. the practice of freeing one's slaves (often in one's will).

So as these two examples demonstrate, the popular historical accounts of the antebellum South and the 1930s get things exactly backwards. It was government intervention in voluntary, private affairs that propped up slavery and led to the Great Depression.

FP: In terms of your specialty on capitalism, could you shed some light on how the lack-of-free-enterprise factor played a role in the collapse of the Soviet Empire?

Murphy: Certainly. There are (at least) two major problems with socialism.

The first -- and this is the one that classical liberal thinkers knew about since the beginning -- is that people have no incentive to produce if all of their output will be divided equally among every member of society. When you add to that the temptations to abuse power, it's evident that a socialist system can't work with real human beings and all of their shortcomings.

However, in the early 20th century economists like Mises and Hayek raised a second, more fundamental objection: Even if we concede for the sake of argument that the central planners are angels, and that the comrades would work just as hard for the stranger 1000 km away as for his own wife and children, socialism still can't work. The reason is that a modern economy is far too complex for any mind or group of minds to "rationally" plan.

Without market prices to guide production decisions--in particular, without profit and loss signals to determine which businesses are using resources efficiently and which should stop altogether -- the central planners have no idea how to use the scarce resources at their disposal. In Mises' words, they are "groping in the dark." They can't even figure out after the fact if their five-year plan were good or bad, because there is more to economic efficiency than simple engineering.

So to finally answer your question, I think both factors played a major role in the collapse of the Soviet Union. There was rampant corruption and horrible abuse of power, but even beyond that there was a systematic inability to harness the vast natural resources of the Soviet Union in order to better the lives of its people. Once the Soviet people gained a more accurate picture of how people lived under the "brutal" oppression of the capitalists -- through shows such as Dallas, for example -- the Soviet Union's days were numbered. Even the ruling class eventually stopped believing in the official propaganda.

FP: Can you think of some ways that we can use capitalism to our advantage in the terror war against radical Islam?

Murphy: I think two things that everyone, hawk or dove, can agree on are the following: (1) The price of oil should come way down and (2) the Iraqi economy needs to start functioning again.

Both of these goals would be achieved if the US government would lift restrictions on energy companies at home (to allow more drilling for oil, more nuclear power plants, etc.) and would implement free market solutions in Iraq. Admittedly, the latter goal is a bit problematic now that the Iraqis themselves are involved, but that doesn't excuse the ridiculous economic policies that were in place when the US was officially running the show over there. Just to give an example, the average Iraqi motorist has to wait hours in line to fill up his car with gas, because of a Saddam-era "privilege" whereby Iraqis are charged very low prices for gasoline. The result is the same thing that happened in the US in the 1970s when we had price controls on gas: long lines at the pump and arbitrary rationing schemes.

Maybe if the Iraqis actually got to enjoy a free market, they would understand why we are so proud of the system. And I think a lot fewer people would decide to become suicide bombers if unemployment were 5% rather than 50% or higher according to some estimates.

FP: So what is the future of capitalism?

Murphy: Ironically the US may take a back seat as other countries surpass us in terms of economic freedoms. There are former Soviet satellites that now have a flat tax, and of course China is becoming increasingly receptive to free market reforms. All this is occurring while the US becomes more and more socialistic.

Of course we can only hope that future US politicians see the light and return to the wisdom of our Founders, but in the meantime I think the general degree of economic freedom, and hence prosperity for the average person, will grow tremendously over the earth in the 21st century.

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